Ratio analysis can be defined as the process of ascertaining the financial ratios that are used for indicating the ongoing financial performance of a company using few types of ratios such as liquidity, profitability, activity, debt, market, solvency, efficiency, and coverage ratios and few examples of such ratios are return on equity, current ratio, quick ratio, dividend payout ratio , debt-equity ratio, and so on. Ratio analysis is a process used for the calculation of financial ratios or in other words, for the purpose of evaluating the financial wellbeing of a company. The values used for the calculation of financial ratios of a company are extracted from the financial statements of that same company. This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues with an entity, such as its liquidity , efficiency of operations, and profitability. This type of analysis is particularly useful to analysts outside of a business, since their primary source of information about an organization is its financial statements. Ratio analysis is less useful to corporate insiders, who have better access to more detailed operational information about the organization.
It will also be regularly used by successful candidates in their future careers. The syllabus categorises ratios into four headings: profitability, liquidity, activity and gearing. Profit is necessary to give investors the return they require, and to provide funds for reinvestment in the business. Three ratios are commonly used.
Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market. Ratio analysis is one of three methods an investor can use to gain that understanding. Business analysis and profitability : Financial ratio analysis allows an observer to put the data provided by a company in context.